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The Enron Case Study
The Enron Case Study
Contents
TOC o “1-3” h z u HYPERLINK l “_Toc377058940” Introduction PAGEREF _Toc377058940 h 1
HYPERLINK l “_Toc377058941” Case background: the rise and fall of Enron PAGEREF _Toc377058941 h 1
HYPERLINK l “_Toc377058942” Enron’s fraud and conspiracy trial PAGEREF _Toc377058942 h 3
HYPERLINK l “_Toc377058943” The aftermath of the Enron scandal PAGEREF _Toc377058943 h 5
HYPERLINK l “_Toc377058944” Conclusion PAGEREF _Toc377058944 h 5
HYPERLINK l “_Toc377058945” Works Cited PAGEREF _Toc377058945 h 5
Introduction
The Enron scandal which came to light in October 2001 was one of the major frauds in the United States involving a multibillion dollar corporation with thousands of employees and affiliations right up to the White House. It is a scandal that led to Enron Corporation, a giant Houston, Texas-based energy company, to file for bankruptcy and the dissolution of Arthur Andersen, a leading audit and accountancy firm in the US. The fall of Enron represents one of the biggest audit failures in the world (Benston 12). It is a clear-cut example of how mismanagement, conflict of interests, and accounting fraud can result in financial chaos, loss of jobs, and destruction of livelihoods for thousands. The fall of Enron provides concrete lessons in the moral responsibility of individuals and corporations to the general public. This paper examines how the fraud occurred, who was responsible, the reasons for the debacle, an analysis of the court proceedings of the case, and the implications the matter had on corporate ethics and accounting practices in the US.
Case background: the rise and fall of Enron
Before its self-instigated implosion, Enron was a leading giant in the energy sector throughout the 1990s. The company came into being after the 1985 merger of Houston Natural Gas and a Nebraska-based gas pipeline firm formerly known as Inter-North. Enron Corporation was universally recognized as one of the most innovative companies in the new e-commerce economy and trading practices. It was involved in a variety of business activities ranging from trading in gas and electricity futures, advertisers’ broadcast time and Internet bandwidth among others. Before its bankruptcy in 2001, the company had ventured into communications and pulp paper industries with an annual rise in revenues from $9 billion in 1985 to more than $100 billion by the end of the 2000 financial year (Thomas). However, revelations of institutionalized and creatively planned accounting frauds by Enron’s top executives reached the public domain at the end of the year 2001. It also emerged that Enron had taken heavy debts since its inception and had lost its exclusive rights after deregulation of gas pipelines.
In an effort to find a fast solution to the company’s revenue and credit problem, Enron’s CEO, Kenneth Lay, sought the help of a young sharp minded banking and financial consultant, Jeffrey Skilling. Little did he know that Skilling would turn out to be the company’s Achilles’ heel. Skilling assembled a team of the sharpest and most shrewd talents in the business world who made Enron an overnight success in electrical futures and Web based commodities trading. When cracks began appearing in the company’s financial crown, Lay, Skilling, and the company’s contracted auditing firm, Arthur Andersen, resorted to accounting fraud, misrepresentation of revenue, and a general disregard of business ethics to stay afloat. Revisions of the company’s financial statement revealed that it had made losses totaling $586 million for the five years preceding 2001. Enron’s stock price dropped from $90 per share in 2000 to less than one dollar at the end of 2001 (Thomas). In December 2001, Enron which was at one time the seventh largest firm in the US, declared bankruptcy leaving over 4,000 employees jobless and losses totaling billions of dollars for its investors.
A discussion of the Enron scandal can not be completed without the mention of the role played by its accountants, the Arthur Andersen firm. Officials of the audit firm maintained that the fall of Enron was not due to accounting malpractices but rather as a result of the company’s faulty business model. However, investigations by external auditors and law enforcements agencies found Andersen liable to negligence in its accounting practices and having worked in conspiracy with Enron to create and present false information about the company’s earnings reports (Fox 23). Andersen was also found culpable of assisting Enron’s CEO to hide large sums of debts in order to artificially inflate stock prices. Investigations revealed that the firm had either misdirected or actually shredded thousands of incriminating documents about the true extent of Enron’s financial woes. The absence of the documents allowed the fraud to continue unabated firmly establishing Arthur Andersen’s responsibility in the fraud. The accounting firm’s involvement in the scandal raised questions about the ethical standards of the American accounting system.
Enron’s fraud and conspiracy trial
The trial involved federal prosecutors led by Sean Berkowitz presenting their case against Enron’s former executives Kenneth Lay, Jeffrey Skilling and others for lying to investors and the public and for gross accounting malpractices. There were video and audio exhibits showing Jeff Skilling talking to top executives and employees about the good health of the company’s broadband division and the bright prospects the division had in the near future. It was further demonstrated that Skilling had intentionally misled investors on the stability of the broadband department with full knowledge of the company’s inability to sustain its operations. The prosecution presented 53 counts against the company’s executives in a 65-page indictment that included financial crimes, bank fraud, falsified statements, securities and wire frauds, insider trading, and money laundering.
For more than eight weeks the government presented a total of 22 witnesses to demonstrate that the former Enron executives were actually the architects of the biggest corporate fraud in the history of the United States. Major witnesses included Enron’s former chief of finance, Andrew Fastow, who admitted to two counts of irregular wire and securities fraud perpetrated in 2004. Ben Glisan, the former Enron treasurer, was another witness for the prosecution who pleaded guilty to a single count of conspiracy in 2001. He was sentenced to a five year prison term (Mulligan). Both Fastow and Glisan testified that the two top executives, Lay and Skilling had full knowledge of the company’s dire financial status when they misled investors and employees about the fictitious financial stability of the company. For close to sixteen weeks, teams of high-priced defense attorneys battled to discredit the testimonies given by the cooperating witnesses and the admissibility of each piece of evidence presented. Notably, Skilling’s lawyer, Dan Petrocelli implored the jury to take a keen look at Skilling and decide if he was a criminal. The defense side accused the prosecution of presenting a Hollywood style conspiracy case by forcing innocent Enron employees to plead to crimes they never committed with the sole intention of making them testify against their former bosses.
Enron’s former CEO, Jeffrey K. Skilling, was sentenced to serve more than 24 years in prison for his role in the collapse of the company. He was further forced to forfeit $45 million which was a big blow to his personal fortune. While passing the judgment, Judge Simeon T. Lake III stated that Skilling’s crimes had condemned thousands of victims to a life of poverty. Convicted of six counts of securities and wire fraud, Kenneth Lay was sentenced to a total of 45 years in prison. For reckless standards in its audit practices and obstruction of justice by shredding thousands of financial documents and deleting company files and emails, Enron’s auditor firm was put out of business. The firm representatives surrendered the company’s CPA license in August 2002 leaving over 85,000 employees jobless (Nelson and Rountree 293).
The aftermath of the Enron scandal
The company’s massive headquarters in Downtown Houston was leased to a group of banks after the company closed down. Its shareholders had lost over $74 billion in the four years preceding Enron’s bankruptcy. The company’s creditors were paid by earnings from an auction of Enron’s assets which included art, logos, and pipelines. Over 20,000 former employees of the company filed a suit for $85 million in lost wages and pensions which they won in May 2004 for a sum of $2 billion. Each received $3,100 from the settlement. In 2005, former Enron investors received a $4.2 billion settlement from a number of banks and later won a $7.2 billion settlement in 2008 (Doran).
Conclusion
The Enron saga left an everlasting impact on the corporate world in the US. It specifically heightened the importance and need for integrity in accounting and business processes for executives and employees of all types of businesses. It led to the creation of new measures to safeguard against a repeat of another scandal of such magnitude (Gillian and Martin 929). A good example is the legislation that provides guidance on corporate ethics, accounting requirements, and financial disclosure known as The Sarbanes/Oxley Act (McCrie 45). The legislation aims at total elimination of corporate fraud similar to the case of Enron. On the positive side, the Enron experience led to an increased protection of investors in the business arena.
Works CitedBenston, George. The Quality of Corporate Financial Statements and Their Auditors Before andAfter Enron. Policy Analysis 497 (2003): 12. Print.
Doran, James. “Enron Staff Win $85m.” The Times (London) 14 April, 2004. Web. 16 April2012.
Fox, Loren. Enron: The Rise and Fall. New York: Wiley & Sons, 2003. Print.
Gillian, S. and martin J. D. Corporate governance post-Enron: Effective reforms, or closing thestable door? Journal of Corporate Finance 13.5 (2007): 929-958.Print.
McCrie, Robert D. Security Operations Management. Woburn, MA: ButterworthHeinemann,2002. Print.
Mulligan, Thomas. “Enron’s Top Executives are Convicted of Fraud.” L.A Times. 26 May,2006. Web. 16 April, 2012.
Nelson, K. and Rountree B. The Market Reaction to Arthur Andersen’s Role in the EnronScandal: Loss of Reputation or Confounding Effects? Journal of Accounting &Economics 46.2 (2008): 279-293.
Thomas, Booth. Called to Account. 2002. Web. 16 April, 2012.
The Enlightenment was a seventeenth
Name
Professor
Course
Date
Enlightenment
Introduction
Enlightenment was undertaken in between the 17th and the 18th century. It was an international movement that was composed of sensibilities and ideas that concentrated on critical reasons as opposed to issues like the religious dogmatism. It gave rise to scientific thinking that were different from religious concerns (Burns, Robert and Hugh 12). In most cases it concentrated on the nature as well as the natural order as a bank of knowledge. Enlightenment thinkers were able to defend religious freedom and tolerance (Burson 15). The motive behind human rights and intellectual freedom led to conflicts that later advocated for new information, ideas as well as gave rise to establishments in America and Europe amid other nations in the world. The Enlightenment was a better part of changes as opposed to negativity.
The Enlightenment is United States of America was reasonable than the one that took place in Europe. It was able to influence both political and religious organization and platforms through the nation. Many scholars have urged that its approach to religion acceptance was at its pick of fame in USA in greater part because not even a single group among those in the Enlightenment could garner enough votes to get themselves onto the fledging nation. Pioneers such as Benjamin Franklin were considered the supports of Enlightenment ideas (Eger 34). This is because to their thoughts it was a freedom-loving rationalism that was intended to bring up a foundation independence as well as the constitution of United States of America. Truly, this was the outcome of America’s Enlightenment as the country was able to garner its constitution as well as independence.
The rise of Enlightenment bred various religious dispute. Many of the supporters commonly denoted as Christians, dismissed revivalist religion. They considered that this was a great awakening as well as an emotional excessive (Burns, Robert and Hugh 17). On the other hand, protestant noted that enlightenment ideals were risky to shy away from and was a mode of solidarity to free the nation as well as make it a budding country. It’s clear that Enlightenment was so passive in the United States that not a good number of Americans were exclusively bounded to its waves (Frazer 21).
It is evident that both the revivalist and the emotionalism as well as the rational individuals related to Enlightenment played vital roles in the American Revolution. The radicals were from all religious groups (Frazer 11). Most of them shared a common commitment to freedom of the American people as well as freedom of religion. Though not all, the radicals or the revolutionaries took part in the enlightenment process not for the wholly freedom of religion in the United States but that of their individuals denominations. However, most of them eyed the nation’s freedom to independence. The enlightenment was a foundation to experiments in religious freedom.
Conclusion
The enlightenment was now part of American Myth. It has become a powerful source of information about the American origin. The movement acts as a storyboard that led to the creation of new Christian society, led to the birth of constitution and also independence of America; I conclude by saying that it is true that the enlightenment fostered positive change to America such as development of religious tolerance, American Revolution, and spirit of service.
WorksCited
Burns, Robert M., and Hugh Rayment-Pickard. “Philosophies of History: From Enlightenment to Post-modernity.” (2000).
Burson, Jeffrey D. The Rise and Fall of Theological Enlightenment. University of Notre Dame Press, 2010.
Eger, Elizabeth. Bluestockings: women of reason from Enlightenment to Romanticism. Palgrave Macmillan, 2010.
Frazer, Michael L. “The Enlightenment of Sympathy: Justice and the moral sentiments in the eighteenth century and today.” (2010).
Portfolio Theory Investment Report
Portfolio Theory Investment Report
Student Name:
University:
Subject:
Instructor:
December 10th, 2013.
PORTFOLIO THEORY INVESTMENT REPORT
Our investment strategy involved watching financial news closely and investing in stocks that would likely react to the news that day since we had very limited time to invest. We initially had very little knowledge of the US stock market and therefore researched several blue chip stocks to see, which of them had been performing well Cox and Huang (2009) so that we could invest £5 million in pension fund and £5milion in hedge fund as had been requested.
On the 8th November, we placed orders for $3 million of shares, distributed equally between BARC LN, LLOY LN, MKS LN and RBS. On the 11th November, we placed orders to distribute the remaining £2 million equally between additional shares of the aforementioned four companies.
On the 14th November, we also began margin trading, and invested t £1 million of the hedge fund to buy shares in TSCO, WTB, WMW and ULVR, TSCO reported a profit of £266 million (77 cents a share) up from £12 million (4 cents a share) a year earlier, despite only being expected to report a profit of 11c a share. We purchased 2782 shares at £634.15 each and sold them all on 23rd November for £635.96 a share. Our choice to invest in TSCO resulted from their report of second-quarter earnings of 66 cents per share, up from 56 cents a share a year earlier. We purchased 5 655 shares at£ 552.88 a share and sold them all on 23rd November for £554.24 each.
We traded heavily on the 23rd November. We purchased 5545 shares in RBS LN Equity at £679.36 a share after the company retained Top Rank on SVTC’s Solar Scorecard. We sold these shares the next day at £ 679.36 a share after they failed to increase in value. We purchased 433 shares in Taser International at £11.40 a share after it was forecasted that demand for the company’s Axon wearable video cameras would soar due to a change in the stop-and-frisk law in New York City. We continued to hold these shares throughout the entire period, due to the price continuing to rise. At the end of the trading the share price was £15.81.
We also purchased 7 776 shares in Admira at £6.50 a share after discovering that there had been heavy trading in these shares over the past day. The shares had risen in price by 45.3% since June. We held these shares until the end of the trading, in the hopes that the share price would continue to rise. At the end of the trading the share price was at $6.95 per share. We purchased 3082 shares in JKX at £12.90 a share due to the $3 increase in share price over the past ten days. We held these shares until the end of the trading. Their closing price was $14.36. Another stock purchased that day was CAN, due to the recent increase in share price. We purchased 5075 shares at £8.62 a share. At the end of the game their price was £11.60.
We placed an order for 2011 shares fromTLW at $23.32 a share, also due to a £2.98 increase in share price that had occurred over the past 10 days. At the end of the trading, these shares closed at £25.80. We made our first attempts at short selling on the same day. We placed an order to short sell 400 shares in Pandora at £19.96 a share after they announced a second-quarter loss of 3 cents a share, despite being forecasted to earn 2 cents a share. We made a tiny profit, as the shares we bought to cover these later that day were at a price of £19.04 a share. Although the profit seems like it was hardly worth it, this was mostly an experiment to try our hand at short selling.
This helped us to gain some confidence in short selling and we tried it twice more that day with larger orders. We placed an order to short sell 5095 shares in HOIL at $42.45 a share following news that it was being evaluated for a downgrade. We covered these on the 27th November at a price of £41.89 per share. We also placed an order to short sell 1059 shares in CAPC at a price of £158.60, and 4585 shares in PMO at £52.04 a share, for the same reason as CAPC. We covered both of these on the 27th, at a price of £155.85 per share for CAPC, and £51.03 per share for PMO.
On the 29th November, we purchased 2505 shares in MER following news of a buyout by Amgen. Amgen purchased MER for £125 a share. Unfortunately, due to the limitations of the trading period, our shares vanished without us receiving the gains. The other purchase on the 29th November was 2676 shares in UKM at £87.73 a share, after a general rise in energy stocks following the release of data showing U.S. and global manufacturing activity on the rise. At the close of the trading, the share price was £88.44. We purchased 692 shares in CSR at £121.36 a share, and 3083 shares in THE BKG at £20.20 a share, for the same reason as UKM. At the close of the trading, the share prices were £119.65 and £21.23 respectively.
The next order that day was to short sell 4067 shares in the consumer discretionary SPDR at £58.38 a share; following a recommendation by the Bank of America for investors to start avoiding consumer discretionary names. However, we were unsuccessful in this endeavour, as the share price continued to rise and closed the transaction at £62.04. We also placed an order to short sell 3058 shares in PRU at £76.22 a share, after the probability of US airstrikes against Syria decreased. Raytheon was the manufacturer of what would have been the weapon of choice, the Tomahawk missile. We covered these shares on the same day, at a price of £75.98 per share.
Following the heavy trading we had been doing, we decided to cease purchasing for the next few days and just let our portfolio increase in value from increases in share prices (Föllmer. and Leukert, 2009). We did not trade again.
Causes of Performance Gap
In most cases, when a corporation announces its earnings report, market automatically reacts to that news through adjusting the corporation’s share price (Amenc, Goltz, Martellini, and Milhau, 2010).). This share price is based on the investors’ expectation regarding the company’s earning potential. As Leland (2004) argues earnings are fundamental valuation element while determining the security price, and they are an instrument that could very drastically change the stock price. Since HOILs announcement of the earnings of £3.96 did not meet the expectations of the investors, the stock prices dropped causing the performance gap.
Since our investment strategy entailed a close watch of the financial news daily and investing in securities that would possibly positively or negatively react to the news of the day, we can report that during our investing period the stock market appeared to be efficient in overall. The share prices were comparatively priced depicting the all the available news (Black and Perold, 2002). For instance HOIL’s announcement of the earnings of £3.96 which did not meet the expectations of the investors, were reflected in the decline on the HOIL’s stock prices.
Lessons
From the market share game, I have learned various key issues. To start with, I have observed that often, the share prices of firms within the same industry such as MER and Amgen tend to move in tandem with one another. This is so because the conditions of the market usually affect these corporations in similar way (Detemple & Rindisbacher, 2008). However, in some instances the stock price of a firm could benefit from aspect of negative news of its rival. I have also learnt that news announcements on profits and earnings as well as future projected earnings affected the stock prices as in the case of CAN and Admira whose earnings reports increased and decreased their stock prices respectively. The other thing I have learned is that investor confidence can make the stock price to either fall or rise.
Conclusion
Since now I have some idea regarding the key factors that either makes share prices to increase or fall, in the future prior to carrying out any purchase or investment, I will ensure that I have comprehensive information of the firms that I intend to invest in based on those factors. Also, in future before investing one of my investment strategies would be to hold my stocks for a short period, and obtain short term return, since I have learned that when the stocks are held for longer duration, the stock prices are more likely to be fluctuant.
References
Amenc, N., F. Goltz, L. Martellini, and V. Milhau (2010). New frontiers in benchmarking
and liability-driven investing. EDHEC-Risk Institute Publication.
Black, F. and A. Perold (2002). Theory of constant proportion portfolio insurance.Journal of
Portfolio Management 16, 403–426.
Cox, J. and C. Huang (2009). Optimal consumption and portfolio policies when asset prices
follow a diffusion process. Journal of Economic Theory 49(1), 33–83.
Detemple, J. and M. Rindisbacher (2008). Dynamic asset liability management with tolerance
for limited shortfalls. Insurance: Mathematics and Economics 43(3), 281–294.
Lando, D. (2004). Credit Risk Modeling: Theory and Applications. Princeton University
Press.
Leland, H. (2004). Corporate debt value, bond covenants, and optimal capital structure.
Journal of Finance 49(4), 1213–1252.
Teplá, L. (2001). Optimal investment with minimum performance constraints. Journal of
Economic Dynamics and Control 25(10), 1629–1645.